Consumer Law & Policy Blog

Public Citizen Wins Supreme Court Victory Allowing Class Actions in Federal Court!

 The U.S. Supreme Court today decided that state laws barring class actions can't trump federal court rules allowing them.  The case, Shady Grove Orthopedic Associates v. Allstate Insurance Company, was argued by Public Citizen's Scott Nelson.  Congratulations, Scott!

Today's decision, written by Justice Scalia and joined by Chief Justice Roberts and Justices Stevens, Thomas and Sotomayor, accepted our argument that the federal rules, by their terms, authorize class actions in any case that meets the criteria set by the rules, and conflicting state laws cannot override the federal rules.  As the majority opinion put it, federal procedural standards "create a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action," and that rule "automatically applies" in all cases in federal court, even if a class action would not be allowed in a similar case brought in a state court.

The case ensures that class actions will be available as a means for redress for plaintiffs advancing claims based on both state and federal substantive law if there is a basis for federal court jurisdiction over the case.  Because Congress expanded federal-court jurisdiction over class actions in the so-called "Class Action Fairness Act" (CAFA), state efforts to curtail class actions will not be effective for large numbers of cases over which CAFA provides federal jurisdiction.
 
This particular case, for example, involves a New York law that says that in New York courts, a class action cannot be maintained to seek "statutory penalties." The plaintiff class in this case sought to recover interest on late-paid insurance claims, as required by a New York statute.  If such lawsuits had to be brought on an individual basis, the claims of any one individual would probably not be worth litigating, so New York's rule barring class actions, if it applied, would effectively be the death-knell for the case.  But because the case was filed in federal court, where, under today's ruling, the New York class-action ban does not apply, the class may now have an effective remedy for the insurance company's practice of paying claims late without paying the required interest.

Delaware lawyer John Spadaro originally filed the case in federal district court and persuaded the Supreme Court to hear it after the lower courts had dismissed it on the basis of New York's class action ban.  Mr. Spadaro acted as co-counsel when the case was briefed and argued on the merits before the Supreme Court.  Public Citizen's Brian Wolfman was also co-counsel.

The briefs and opinion in the case are available online here.   Forbes wasted no time in letting us know that they don't like Justice Scalia's opinion.

Bankers Were for Separating Safety and Soundness Regulation from Consumer Protection Before They Were Against It

Here's a quote from Elizabeth Warren's op-ed yesterday in Politico, referring to the 2006 filing from the American Bankers Association:

In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for “combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.”

The ABA went on to argue that the “marriage of inconvenience between supervision and consumer protection appears to blur long-established jurisdictional lines.” And then: “ABA recommends that the safety and soundness provisions relating to underwriting and portfolio management be separated from the consumer protection provisions.”

Read that again: The ABA in 2006 said that policymakers should separate safety-and-soundness and consumer protection — exactly the opposite of its position today.

Recent Opt-out and Opt-in News

by Jeff Sovern

Two recent developments illustrate anew the difference between opt-outs and opt-ins.  As the New York Times reported last month, JPMorgan Chase is bombarding customers with mailings urging them to opt in to over the limit fees on their debit cards.  That's because under rules to take effect this summer, banks won't be able to charge over the limit fees unless depositors opt in.  So, according to the Times, "Chase and other banks are preparing a full-court marketing blitz, which is likely to include filling mailboxes with various aggressive and persuasive letters, calling account holders directly, and sending a steady stream of e-mail to urge consumers to keep their overdraft service turned on."  In other words, the effect of an opt-in is to give companies an incentive to get the attention of consumers and argue that they should depart from the default. 

Opt-outs create a very different incentive.  Take, for example, the Gramm-Leach-Bliley privacy rules.  They permit financial institutions to sell information about consumer  transactions unless consumers opt out.  Financial institutions are obliged to send consumers annual notices of their privacy rights.  Because banks want to sell consumer information, they face incentives to construct privacy notices that fly under the consumers' radar, so consumers don't notice them and opt out.  As a result, regulators had to promulgate detailed rules designed to increase the likelihood that consumers will read the notices.  It appears, however, that those rules have largely failed; my impression is that relatively few consumers have opted out (I wrote about this in the context of transaction costs here).  Last November, regulators promulgated model forms for financial institutions to use; financial institutions using the model forms are deemed in compliance with GLB.  I haven't yet heard of any institutions using the model forms, but if you have, please so indicate in the comments below.  Actually, I'm not sure why institutions selling consumer information would use the model forms. Because they're relatively readable, as opposed to the forms many financial institutions use, the model forms increase the likelihood that consumers will opt out, thus reducing revenue from selling information.  By contrast, not using the model forms increases the risk that a financial institution will be found to have violated GLB--but since there's no private claim under GLB, it's not clear that matters much.

So notice the contrast: opt-outs create incentives that lead to consumers not being aware of their rights, while opt ins give businesses an incentive to try to get consumers to notice.  Opt-ins also result in consumers being exposed to the arguments for departing from the default (as Chase put it "We want [consumers] to make an informed decision."), while opt-outs give businesses an incentive to conceal those arguments.  The argument the other way, of course, is that opt-ins are more expensive.  I wrote about this once upon a time at 74 Washington Law Review 1033 (1999); it's disappointing that nothing has changed.

More on the Dodd Bill's Consumer Protection Veto Council

by Jeff Sovern

As we've noted in the past, Senator Dodd's bill subjects the proposed consumer financial protection bureau to a veto by a two-thirds vote of a Financial Stability Oversight Council. Raj Date, Executive Director, Cambridge Winter Center for Financial Institutions Policy, has prepared a series of slides exploring, among other issues, how the Council would have voted back in 2005 if it had considered non-traditional mortgage protection.  The conclusion:

Unfortunately, given the public pronouncements of key regulators at the time, it is quite likely that a Financial Stability Oversight Council -- if it had been in place during the credit bubble -- would have overruled a Consumer Bureau's attempts to rein in the non-traditional mortgage market. The existence of the veto provision, in other words, would have prevented the Consumer Bureau from taking its most significant potential actions to forestall the credit crisis.

Of course, it's impossible to know what would have happened with such a counterfactual, but given the importance of getting this right, taking unnecessary chances doesn't seem like a good idea.

Obama Administration Plans to Move More Aggressively to Help Consumers Facing Foreclosure

The lead story in today's Washington Post explains that the Obama Administration is planning to overhaul its aid program for consumers facing foreclosure. Apparently, the Administration believes that its current program is not helping enough, particularly in light of persistent high unemployment. The story begins this way:

The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday. Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, administration officials said, a lender could allow a borrower to skip payments altogether.

The Post story is accompanied by this Q&A explaining how the new program will work and its eligibility rules.

New Federal Student Loan Law

Tucked away in the health care reconciliation legislation that awaits President Obama's signature is landmark student loan legislation. Among other things, it makes federally subsidized and guaranteed student loans largely the province of the federal government, cutting out private bank involvement. The law also expands the ability of low and moderate income graduates to have their loans forgiven. The New York times explains here.

Take consumer watchdog off the Fed's leash: Sen. Chris Dodd's bill will weaken a critical new agency

by Jeff Sovern

I have an op-ed in today's New York Daily News on the placement of the consumer financial protection bureau within the Fed.  Here are the first three paragraphs:

Just imagine that years before the subprime crisis hit, Congress had directed a federal agency to prohibit unfair or deceptive mortgage loans, as well as abusive practices in home refinancings. Would we have had all those loans that later blew up, leading to the Great Recession?

Now suppose the same agency had been charged with creating forms that would help borrowers understand what their monthly payments would be, so that borrowers could avoid taking out loans that they would later find unaffordable. Would the economy be just as bad as it is now?

The answer is yes. How do we know this? Because we had such an agency. It's called the Federal Reserve. But the Fed didn't use its powers to bar bad mortgage loans until 2008, far too late to prevent the Great Recession. Similarly, the disclosures it required mortgage originators to provide did not correctly state borrowers' monthly payments, making it far harder for borrowers to figure out whether they could make those payments.

Massachusetts Attorney General Settles Massive Predatory Lending Case With Countrywide Financial

Massachusetts Attorney General Martha Coakley yesterday settled predatory mortgage lending allegations against Countrywide Financial Corporation (now owned by Bank of America), claimed to require $3.1 billion worth of loan modifications nationwide. Building on a 2008 settlement by 44 state attorneys general, the settlement will provide, in addition to the loan modifications that will reduce loan principal on consumers' mortgage debt, cash for individuals in Massachusetts whose homes have already been foreclosed. Read the Massachusetts AG's press release and the settlement.

More on the Independence (or Not) of the Bureau of Consumer Financial Protection in Senator Dodd's Financial Reform Bill

Recent CLP posts here, here, and here have commented on the fact that Senator Dodd's financial reform bill does not create an independent Consumer Financial Protection Agency but rather establishes a consumer protection bureau within the Federal Reserve whose regulations can be vetoed by a board comprised largely of bank and other financial regulators. Over at Credit Slips, Stephen Lubben explains how that would work. Here's how Lubben begins:

Under section 111 of Chairman Dodd's proposed bill, the new Financial Stability Oversight     Counsel will be made up of

• the Treasury Secretary, who would serve as chair
• the Federal Reserve Chairman
• the Comptroller of the Currency
• the Director of the new Bureau of Consumer Financial Protection
• the Chairman of the SEC
• the Chairman of the FDIC
• the Chairman of the CFTC
• the Director of the Federal Housing Finance Agency
• and an independent member, who must have an insurance background, and would serve a 6 year term

Constitutional Challenges to Health Care Reform: Florida, et al. v. HHS and Virginia v. Sebelius

by Deepak Gupta

A few minutes after the President signed the Patient Protection and Affordable Care Act today, Virginia Solicitor General Duncan Getchell left his office and walked across the street to the federal courthouse in Richmond, where he filed Virginia's constitutional challenge to the new law. 

You can read the seven-page complaint in Virginia v. Sebelius here. It's not a model of legal writing, but it does have the virtue of being concise. It begins with a block quote from a hastily passed state statute affirming the right of all Virginians to choose not to maintain health insurance coverage. Unless I'm missing something, that statute is nothing more than a legally irrelevant political stunt.  The complaint goes on, however, to articulate what I take to be the only serious legal challenge to health care reform -- that the individual insurance mandate goes beyond Congress's Commerce Clause power.  Relying on United States v. Lopez and United States v. Morrison, Virginia appeals to history:

“It has never been held that the Commerce Clause … can be used to require citizens to buy goods and services. To depart from that history to permit the national government to require the purchase of goods and services would deprive the Commerce Clause of any effective limits ..."

This argument has some rhetorical force. It's also rooted in a radical conception of individual liberty that one can imagine attracting some judges -- why should I have to buy insurance simply as a condition of being alive? I'd prefer to live in a cabin and avoid any obligations to society -- but it's hard to square with existing law. In particular, it's difficult to reconcile the  argument with Gonzalez v. Raich. As with marijuana, individuals' decision to purchase health insurance can have a “substantial effect on supply and demand in the national market for that commodity." Id.; see also United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944) ("No commercial enterprise of any kind which conducts its activities across state lines has been held to be wholly beyond the regulatory power of Congress under the Commerce Clause. We cannot make an exception of the business of insurance."). Even smart libertarians agree that the argument is exceedingly unlikely to succeed.

Down in good ole Tallahassee this afternoon, Florida AG Bill McCollum filed a 22-page complaint on behalf of himself and the AG's of 12 other states (South Carolina, Nebraska, Texas, Utah, Louisiana, Alabama, Michigan, Colorado, Pennsylvania, Washington, Idaho, and South Dakota). The Florida suit, whose architect is David Rivkin of Baker Hostetler in D.C., echoes Virginia's challenge to the individual mandate.  It also raises two arguments that have even less chance of success: (1) that the legislation violates the Tenth Amendment's anti-commandeering principle, and (2) that the penalty on uninsured persons is a capitation or direct "tax" that is not apportioned among the states according to census data, in violation of Article I, section 9 ("No Capitation, or other direct Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."); see Eisner v. Macomber, 252 U.S. 189, 206 (1920).  Huh?